<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from _______________ to _______
Commission file number 0-24242
PRODUCTIVITY TECHNOLOGIES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3764753
--------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
206 South Main Street, 2nd Floor, Ann Arbor, Michigan 48104
-----------------------------------------------------------
(Address of Principal Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code (734) 996-1700
----------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of class)
Units, each consisting of one share of Common Stock
and two Redeemable Common Stock Purchase Warrants
---------------------------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
State the approximate aggregate market value of the voting stock held
by nonaffiliates of the registrant at September 30, 2000: $1,984,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 2000
-------------------------- ---------------------------------
Common stock, $.001 par value 2,475,000 shares
Documents Incorporated by Reference: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Productivity Technologies Corp. (the "Company") was incorporated in June
1993 under the name Production Systems Acquisition Corporation with the
objective of acquiring an operating business engaged in the production systems
industry. The Company completed an initial public offering ("IPO") of common
stock in July 1994 and raised net proceeds of approximately $9.0 million. In
May 1996, the Company changed its name to Productivity Technologies Corp. and
acquired, through a merger, Atlas Technologies, Inc. ("Atlas") as a wholly owned
subsidiary. On February 23, 2000, the Company purchased, through a wholly-owned
subsidiary formed for this purpose, substantially all of the assets of Westland
Control Systems, Inc. ("Westland"). The Company has no other subsidiaries or
operations. The Company, which produces industrial machinery, operates in a
single segment through its Atlas and Westland subsidiaries.
Sales of Atlas products have principally been to automobile and automotive
parts manufacturers and appliance manufacturers. Other customers include steel
service centers and manufacturers of lawn and garden equipment, office
furniture, heating, ventilation and air conditioning equipment, and large
construction equipment. Sales to automotive related customers account for the
majority of sales. Westland's customers participate in the automotive, food
processing, adhesive and sealant, and other industries.
Atlas is a leading innovator and supplier of quick die change, flexible
transfer, and stacking/destacking equipment used to automate automotive and
other metal stamping operations. Atlas operates two manufacturing plants in
Fenton, Michigan and has sales and engineering offices in Michigan, Europe and
China. Atlas also maintained a sales office in Atlanta which was closed in July
2000.
Metal stamping presses are used to form a wide variety of sheet metal
components used in automobiles, appliances and other consumer and industrial
products. Atlas offers a complete range of products within three categories
critical to the operation of metal stamping presses: quick die changing
equipment, press automation equipment, and stacking and destacking equipment,
which, together, have historically accounted for approximately 85% to 90% of its
sales revenues. It also sells, on a turnkey basis, fully integrated metal
stamping systems comprised of components provided by Atlas and other
manufacturers. During 1998, Atlas began producing and selling finger tooling
for use with its and third party transfer press automation equipment. During
fiscal 2000, Atlas also began to offer standard transfer press cells where Atlas
acts as the systems integrator for its customers.
Metal stamping involves setting pieces of flat sheet metal over a shaped
die which is set in a press and then lowering a matching die onto the sheet
metal to form it into the desired shape. The sheet metal pieces typically pass
through several stamping press operations, each performing a different forming
function. Atlas' products stack cut sheet metal blanks for feeding into the
presses, move components from one press station to another within a multi-
station transfer press or between presses within a tandem line of presses,
facilitate the changing of dies on a press and subsequent die handling
operations (storage, retrieval, and maintenance). Certain Atlas products also
handle stamped parts after they have passed through the stamping presses,
functions known as "End-of-Line" applications.
In recent years, the increasing complexity and precision required in
stamped metal components, such as automobile body and appliance parts, coupled
with the large variety of such components necessary to meet consumer
preferences, has required manufacturers of such products to increase the
flexibility and efficiency of the machinery used in their manufacture. The
presses must accommodate rapid changes in production schedules and produce
profitable batch runs of varying sizes. Equipment such as that made by Atlas is
important to meet the needs of the manufacturers.
2
<PAGE>
Westland designs and manufactures custom electrical control panels
primarily for use in production machinery and machine tools utilized in
automotive, adhesive & sealant, food processing, and other industrial
applications. Westland operates one manufacturing plant in Canton, Michigan,
which is located less than one hour from Atlas' plants in Fenton, Michigan.
Westland's plant comprises approximately 29,000 square feet of manufacturing
space and 11,000 square feet of offices. Its Canton location is centrally
located in Southeastern Michigan nearby numerous machinery manufacturers.
The design and manufacture of control panels for industrial machinery often
occurs in the latter stages of construction. Machinery typically is first built
and subsequently wired. Machine wiring is conducted through the control panel.
While machine wiring and control panels are manufactured in the latter stages of
machine production, they are essential to effective machinery operation as they
turn stationary metal into functional machines. As a result, control panels are
considered a high value added machinery module.
Management believes the Company has been a leader in the refinement of the
processes by which custom electrical panels are built. In particular,
management believes it has effective internal processes to convert the
production of a custom panel into more of a mass production process. At many
stages in the panel build process, Westland has reduced or eliminated certain
steps which incur costs or extend production time. Westland also focuses on
tight inventory control. Often, the more expensive panel components are
received into the factory within one to two weeks of when the entire panel will
be built, quality tested, and shipped to the customer, thus reducing inventory
carrying costs. Inventory consignment arrangements also exist for some
component and component classes.
Management believes Westland's processes help its customers. A number of
Westland's customers seek to outsource a substantial portion of their panel
building requirements. Often, machinery builders which outsource the production
of their control panels are focused on machinery construction first, while the
outsourcing of panel design and production remains a secondary concern. This
can lead to a situation where panels are required within three to four weeks,
rather than the six to eight weeks which management believes is more typical of
the control panel production industry in general. Westland's streamlined
production processes allow the Company to satisfy the rapid delivery
requirements of customers.
Customers and Marketing
Sales of Atlas products have principally been to two customer markets -
automobile and automotive parts manufacturers, and, to a lesser extent,
appliance manufacturers. Other customers include manufacturers of garden and
lawn equipment, office furniture, heating, air conditioning and ventilation
(HVAC) equipment and aircraft. Westland's products are utilized in machinery
for automotive adhesive and sealant, engine part machining, food processing and
other industrial applications.
In the 1998, 1999 and 2000 fiscal years, automotive industry customers for the
Company accounted for approximately 90%, 96% and 91% of sales, respectively.
For such fiscal years, sales by the Company to General Motors Corporation
represented 27%, 14% and 18%, respectively, sales to DaimlerChrysler Corporation
(formerly Chrysler Corporation) represented 10%, 7% and 10%, respectively and
sales to The Ford Motor Company represented 14%, 8% and 16%, respectively, of
total sales. Sales are predominantly in the United States and Canada but, in
recent years, the Company has targeted sales efforts in Mexico, Europe and Asia.
International sales for the 1998, 1999 and 2000 fiscal years represented
approximately 30%, 40% and 15%, respectively, of total sales in such years.
Atlas uses three marketing channels: direct sales, with offices at its
headquarters in Fenton, Michigan, Porthcawl, South Wales, U.K., and Beijing,
China; commissioned sales representatives; and original equipment manufacturers
(OEMs) specializing in metal presses and related equipment. Atlas closed a
sales office in Atlanta, Georgia in July 2000. Westland's sales currently are
solely direct, but Westland is currently evaluating the use of outside
manufacturers' sales representatives.
3
<PAGE>
In October 2000, Westland installed on an experimental basis three live
cameras with Internet access in its production plant as a sales tool for
existing customers, new potential customers, and for the general interest of
Internet users. For security reasons, viewers which are non-customers or
potential customers will have significantly reduced access to the live images
from the plant. Management believes Westland will be one of only a few
manufacturers nationally providing live camera access to its production
facilities via cameras connected to the Internet. Cameras mounted at Westland
will allow users with the proper authorization codes to clearly view activities
which take place as far away as 200 feet from the camera locations. Customers
will be able to log on to the Internet at previously arranged times to view the
final power up and quality testing, prior to shipment, of panels ordered from
Westland.
Order backlogs were approximately $17.0 million, $16.0 million and $13.5
million at June 30, 1998, 1999 and 2000, respectively. The Company believes
substantially all of the June 30, 2000 backlog will be produced during fiscal
2001.
Products
Atlas offers critical, high technology products based on proven designs and
engineering, which it believes offer superior technology, engineering and
features to those offered by its competitors. Atlas products are modular and
may be used with existing systems as well as with completely new systems. As a
result of their modular design, a variety of pieces of equipment can be combined
to form an appropriate solution for a customer's metal stamping needs.
Virtually all of its products are manufactured on a made-to-order basis.
Because of their many desirable features, Atlas products are positioned at an
above-average price comparative to its competitors. The raw materials and
components used by Atlas in the manufacturing process are readily available and,
generally, there are numerous suppliers that are capable of providing these
materials and components.
Atlas personnel perform applications engineering, product design or
customization, procurement, fabrication, machining, assembly, testing, shipping
and installation of the products and systems it sells. Atlas continues to
implement a program to achieve greater standardization in the engineering and
design of its products. To date, the program has resulted in faster order
fulfillment and production, and improved fabrication. Atlas believes that
significant cost-reducing improvements can still be made in the manufacturing
process, particularly from further standardization.
Quick die change equipment made by Atlas includes automated die carts, die
tables and high rise automated storage-retrieval systems which are used to
maneuver stamping press dies and molds weighing up to 100 tons. The Atlas-
developed products allow die swapping to be accomplished in minutes as compared
to hours if conventional equipment is used. Atlas storage-retrieval systems
permit dies not in use to be stored in multiple level racks and readily
accessible to die carts for die swapping. Atlas' equipment can be configured
for use with either manually controlled or fully automated presses. Atlas
believes that its equipment is instrumental in increasing the "up-time" of
presses while also facilitating short run capability, gentle die handling, safer
and improved ergonomics and easier and more efficient die maintenance.
Transfer press automation equipment is sold by Atlas under the names Flex
2000 and Flex 5000(R). Transfer presses use as many as ten dies within a single
press to progressively form the component (typically including tasks such as
drawing or forming, trimming, piercing and flanging). Unlike tandem press
lines, which use multiple presses arranged in a line and require multiple
devices to move a component, transfer presses move the component being processed
from one die station to another using a single automation device. Compared to
tandem presses, transfer presses generally operate at higher production rates,
require less floor space, consume less energy and allow more component processes
per press. Because of this, and because they have fewer parts and require less
expensive quick die change equipment than tandem presses, transfer presses have
become the preferred type of press for new purchases although many tandem
presses will remain in use for many years and can be refitted with automation
equipment. Atlas recently began offering standard Transfer Press Cells as a
systems integrator, comprised of Atlas equipment and presses made by other
manufacturers to more aggressively pursue the transfer press process market
4
<PAGE>
segment.
Stacking and destacking automation equipment is used to handle the sheet
metal in the initial stages of the stamping process. Stackers stack flat blanks
cut from the coiled rolls, which are delivered to the manufacturer. Destacking
equipment feeds the flat blanks into the press and includes functions to
wash/scrub or roll-coat the metal blanks and to queue them to assure a steady
flow. Atlas also produces and sells precision steel pallets for handling the
stacks of sheet metal so as to reduce handling damage and to eliminate the need
for strapping the stack of sheets together.
Westland designs and manufactures custom electrical control panels
primarily for use in production machinery and machine tools utilized in
automotive, adhesive & sealant, food processing, and other industrial
applications. The design and manufacture of control panels for machinery
occasionally occurs in the later stages of the machinery design and construction
process. Machinery must first be constructed, and then wired, where the wiring
is conducted through the control panel. While the wiring of machinery occurs
later in the construction process, the wiring and control panels are essential
to effective machinery operation. It is the wiring and controls, which convert
the machinery from stationary metal to functional machines.
Westland's products range from small, single door electrical panels to
larger six door panels. Selling prices for Westland's products range from less
than $5,000 to more than $100,000 per unit. The electrical control panels are
used by customers to control the mechanical functions of machinery used in
applying adhesives and sealants in automobile production, material handling
equipment for metal forming for automobiles and appliances, the machining of
cylinders for the manufacture of vehicle engines, and the fabrication of
containers for food and juice packaging.
Competition
Atlas management believes Atlas' products are sold in specialized markets
that have limited customers and few competitors. In many instances, Atlas
products are procured through competitive bidding. Because of the capital cost
and the need for skilled personnel, such as engineers, designers, mechanics and
sales persons, entry into this industry is expensive and difficult to achieve
and Atlas does not expect competition to increase significantly over present
levels. Primary competitors of Atlas include ABB Flexible Automation (Sweden),
Herwo Die Changing (Sweden), Orchid International (Canada), Hirotec (Japan),
Verson All Steel Press, a division of Allied Products Corp., HMS Products Co.
and Aisaku (Japan). Each of these companies offers components, which compete
with certain components manufactured or sold by Atlas. A number of the
competitors are well established with substantial financial resources,
recognized brand names, customer loyalty and established market positions,
capable engineering, strong distribution networks and comprehensive
manufacturing capabilities.
Westland management believes Westland's competitors sell their products
primarily regionally. Typically, custom-built control panels are commodity type
products purchased by customers on the basis of quality and reliability,
delivery timing, and pricing. Westland's competitors in Southeast Michigan
include Stegnar Electric, Consistent, JIC Electric, X-Bar Automation,
Electromatic (formerly a distributor but which is moving into panel building
also), Control Technique, Innovative Control Systems, Venus Controls, and
Quantum. The two latter companies are minority owned, and are believed to have
an advantage as suppliers to the auto industry given U.S. automaker commitments
made in April 1998 to increase, and encourage their leading suppliers to
increase, purchases of auto parts from minority owned companies.
In contrast to the possible regional focus of certain competitors, Westland is
focused on customers both within and outside its local region. Westland also
seeks to sell more than control panel building services. It seeks to educate
customers on how they can reduce their internal labor costs by having Westland,
at a cost lower than the customers' labor expenses, more fully prepare the
control panels for final, and more rapid, installation on the customers'
machinery.
5
<PAGE>
Trademarks and Patents
Atlas has an agreement to use components in the FLEX 5000(R) transfer press
automation equipment that it manufactures and sells that are based on patents
owned by the estate of Mr. John Maher. The agreement grants Atlas an exclusive
worldwide license to use the patents for a term equal to the life of the
patents, including any extensions as a result of modifications to the patents.
Currently, the patents registered with the United States Patent and Trademark
Office expire on various dates between June 23, 2005 and June 21, 2007. Atlas
is obligated to pay the estate of Mr. Maher a royalty based on a portion of the
sales price of the FLEX 5000(R) as it relates to the value of the patented
components. For Atlas' fiscal years ended June 30, 1998, 1999 and 2000, the
Company expensed approximately $202,000, $241,000 and $122,000, respectively, in
license fees under this agreement. The agreement also provides that the estate
of Mr. Maher is responsible for defending Atlas for any patent infringements.
Atlas believes that the terms of the agreement with the estate of Mr. Maher are
industry competitive.
Atlas has registered with the United States Patent and Trademark Office a
trademark on "FLEX 5000(R)" that it uses to market its line of transfer
equipment.
Atlas owns and has registered with the United States Patent and Trademark
Office four patents, one for a asynchronous conveyer construction, one for a
transfer arm for supporting work pieces, one for a magnetic sheet separator
construction, and one for apparatus and methods for forming workpieces. Foreign
patents for the latter are held in Australia, China, France, Germany, Italy,
Spain and Sweden with patent applications pending in Brazil, Canada, Korea,
Mexico and Poland. Atlas has applied for four United States patents for an
articulating work piece transfer apparatus, a magnetic sheet fanner, a tooling
gage and finger tooling receiver for transfer press automation equipment.
Foreign patent applications have been filed for the articulating work piece
transfer apparatus.
Atlas holds an exclusive license agreement that covers two more U.S.
patents for a system for transferring workpieces through a series of
workstations and a synchronized dual axis actuator. The system for transferring
workpieces through a series of workstations is protected by foreign patents in
Canada, China, France, Germany, Great Britain, Japan, Republic of Korea, Russian
Federation, Spain and Sweden. This license agreement also encompasses rights to
transfer system patents that are pending in the U.S. and several foreign
countries covered under the Patent Coordination Treaty.
Westland owns one patent related to a lay-in wire way for cords and wires
for use in connection with the field installation of machinery. The product is
trademarked as "Cheeta-Duct(R)". Management believes Cheeta-Duct(R), the low
cost manufacture of which is being developed currently, will allow purchasers of
large amounts of machinery to reduce the field wiring costs associated with
machinery installation. Cheeta-Duct(R) can be installed faster and more easily
than the threaded pipe and junction boxes which it can replace in order to keep
wires insulated from damage by the mechanical functions of the machinery,
thereby reducing labor hours and costs related to machinery wiring.
Management and Employees
The Company employs approximately 220 persons. None of these persons is a
member of a union. The Company believes that its employee relations are good.
The Company's facilities are located in highly industrialized areas that benefit
the Company by reason of their proximity to customers and a quality labor force.
ITEM 2. PROPERTIES
Atlas owns and operates two manufacturing facilities in Fenton, Michigan
and Westland leases and operates one manufacturing facility in Canton, Michigan.
The two Fenton facilities have an aggregate of 94,200 square feet of space. One
of these facilities, built in 1997, has higher roofs and heavier cranes to
facilitate manufacturing of larger equipment and provides approximately 51,000
square feet of manufacturing space and 8,000 square feet of office space. This
facility also is capable of expanding at a later date to approximately 130,000
square feet of manufacturing and 25,000 square feet of office space. Operations
performed in the two Fenton facilities include fabrication, machining, assembly,
electrical panel construction and testing. Project management, engineering,
6
<PAGE>
finance, service, quality, purchasing and sales offices are also located in
Fenton.
The Canton plant, which is leased, has approximately 29,000 square feet of
manufacturing and assembly space and 11,000 square feet for offices. Operations
performed in the Canton facility are designing, assembly and test. Sales,
operations, finance and administration are all located in Canton, MI.
The principal executive offices of the Company are located in a small suite
of offices at 206 South Main Street, 2nd Floor, Ann Arbor, Michigan 48104.
ITEM 3. LEGAL PROCEEDINGS
In 1996, Atlas and the estate of John Maher, the owner of the patent for
the FLEX 5000(R) Transfer which is licensed to Atlas, initiated an action
against Orchid International Group Inc. ("Orchid") in the Federal Court of
Canada, Trial Division, claiming infringement and wrongful sale, manufacture and
use by Orchid of the inventions protected by such patent and seeking, among
other relief, a declaration that the patents are valid and have been infringed
by Orchid, injunctive relief and damages of at least $5,000,000 (Cdn). The
defendant has filed an answer denying the material allegations of the complaint
and asserting a counterclaim requesting that the patents be declared invalid.
Atlas and Orchid are undergoing the third round of examinations as part of the
discovery process, which process is expected to be completed by January 31,
2001, with a court trial expected later during calendar 2001.
The Company is a party to routine litigation matters in the ordinary course of
its business. No such pending matters, individually or in the aggregate, if
adversely determined, are believed by management to be material to the business
or financial condition of the Company. The Company maintains general liability
insurance, workers' compensation insurance, property insurance, automobile
insurance, employee benefit liability insurance, fidelity insurance and
directors' and officers' liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of securityholders during the fourth
quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (Symbol: PRAC) and Warrants (Symbol: PRACW) are listed for
trading on the Nasdaq SmallCap Market. The Company's Units (Symbol: PRACU) are
quoted on the OTC Bulletin Board. The following table sets forth the range of
high and low closing bid prices for Common Stock and Warrants, as reported by
the Nasdaq Small Cap Market. Within the last two fiscal years there has been no
material activity in the Company's Units and therefore, no trading information
is provided. The OTC Bulletin Board is an inter-dealer automated quotation
system sponsored and operated by the NASD for equity securities not included in
the Nasdaq Stock Market. Such over-the-counter market quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily reflect actual transactions.
7
<PAGE>
<TABLE>
<CAPTION>
Common Stock Warrants
----------------- -----------------
High Low High Low
--------- ------ -------- ------
Year ended June 30, 1999:
<S> <C> <C> <C> <C>
First Quarter 4.25 2.38 1.00 0.50
Second Quarter 3.00 1.63 0.63 0.25
Third Quarter 2.75 1.88 0.38 0.25
Fourth Quarter 2.63 1.63 0.25 0.13
Year ended June 30, 2000:
First Quarter 1.75 1.75 0.50 0.25
Second Quarter 1.63 1.25 0.38 0.13
Third Quarter 2.63 1.38 0.63 0.19
Fourth Quarter 1.50 1.28 0.63 0.06
</TABLE>
As of September 30, 2000, the Company had 16 holders of record of its
Common Stock. The Company believes that there are in excess of 500 beneficial
holders of the Company's Common Stock.
The Company has not declared or paid any dividends on its Common Stock
since its inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's
and its predecessor's consolidated financial statements which have been audited
by BDO Seidman, LLP, independent certified public accountants, at June 30, 1996,
1997, 1998, 1999 and 2000, for the periods July 1, 1995 to May 23, 1996, May 24,
1996 to June 30, 1996, and for the years ended June 30, 1997, 1998, 1999 and
2000. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Report and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Report.
8
<PAGE>
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Consolidated Statements of Operations Data
------------------------------------------
The Company Predecessor
---------------------------------------- --------------------
July 1,
Year Year Year Year May 24, 1995
Ended Ended Ended Ended to to
June 30, June 30, June 30, June 30, June 30, May 23,
2000 1999 1998 1997 1996 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues Earned $33,230 $34,001 $36,040 $34,438 $4,404 $31,598
Cost of Revenues Earned 26,335 24,610 27,563 24,825 3,029 21,773
Gross profit 6,895 9,391 8,478 9,613 1,375 9,825
Selling, general and administrative 6,333 7,526 8,538 7,081 729 6,007
Officers' bonuses -- -- -- 711 197 2,117
Bonus restructuring expense -- -- 2,132 -- -- --
Income (loss) from operations 562 1,865 (2,192) 1,821 448 1,701
Net income (loss) (256) 974 (2,012) 593 204 762
Net income per share of common stock ($0.10) $.40 ($0.95) $.28 $ .10
Weighted average common shares 2,475 2,432 2,125 2,125 2,125
</TABLE>
Consolidated Balance Sheet Data
-------------------------------
<TABLE>
<CAPTION>
The Company
------------------------------------------------------ --------
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Current assets $22,972 $19,148 $15,272 $22,627 $18,690
Current liabilities 8,155 5,330 5,470 7,284 13,642
Working capital 14,817 13,818 9,802 15,343 5,048
Property, plant and equipment, net 7,708 7,844 8,289 7,667 4,240
Total assets 39,238 30,108 26,809 33,410 26,023
Long-term debt, less current maturities 20,862 13,951 11,254 15,327 2,228
Total liabilities 29,777 20,391 18,160 23,444 16,650
Stockholders' equity 9,461 9,717 8,649 9,966 9,373
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The fiscal year ended June 30, 2000 is the fourth full year of consolidated
activities for Productivity Technologies Corp. Revenues at Atlas are recognized
using the percentage-of-completion method, which measures the percentage of
contract costs incurred to date and compares these costs to the total estimated
costs for each contract. Atlas estimates the status of individual contracts
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Contract costs include all direct material
and labor costs, and those indirect costs related to contract performance, such
as indirect labor, supplies, repairs and depreciation costs. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job condition, estimated
profitability, and final contract settlement may result in revisions to costs
and income, and are recognized in the period in which such revisions are
determined. Sales at Westland are recognized when products are shipped.
Results of Operations
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues earned for the year ended June 30, 2000 were $33,230,195 as
compared to $34,001,248 for the year ended June 30, 1999, a decrease of 2%,
principally as a result of lower order volume at Atlas during fiscal 2000. The
revenues earned of Westland, which was acquired by the Company on February 23,
2000, represented 4% of the total revenues earned by the Company in fiscal 2000.
The order backlog as of June 30, 2000 was $13,500,000, down from the June 30,
1999 backlog of $16,000,000. The decline in backlog was mainly due to slower
closings of new orders at Atlas. The Company believes automotive industry
capital spending has been sluggish recently.
Cost of revenues earned for the year ended June 30, 2000 was $26,334,826,
up 7% from costs of $24,609,631 for the year ended June 30, 1999. Cost of
revenues earned as a percentage of revenues increased to 79% of revenues earned
during the year ended June 30, 2000 as compared to 72% for year ended June 30,
1999. The increase in cost of revenues earned as a percentage of revenues for
the year ended June 30, 2000 was primarily due to product mix and cost overruns
incurred by Atlas late in the production cycle for certain products.
Gross profit for the year ended June 30, 2000 was $6,895,369, representing
a 27% decrease from the $9,391,617 gross profit for the year ended June 30,
1999. Gross profit decreased during fiscal 2000 principally for the reasons
cited above related to the increase in cost of revenues earned as a percentage
of revenues. Westland's contribution to the Company's total gross profit was
approximately 3.5% in fical 2000.
Consolidated selling, general and administrative (SG&A) expenses were
$6,332,966, down 16% as compared to SG&A expenses of $7,526,448 for the year
ended June 30, 1999. In January 1999, and continuing through June 2000, the
Company reduced fixed costs as part of a cost reduction initiative. The decline
in SG&A expenses for fiscal 2000 as compared to fiscal 1999 is due principally
to cost reductions at Atlas, partially offset by the inclusion of Westland's
SG&A expenses for an approximately four month period following its acquisition
by the Company on February 23, 2000. The Company's corporate expenses also were
lower in fiscal 2000 than in fiscal 1999 due in part to the decrease in the
number of directors effective as of December 31, 1999.
Income from operations for the year ended June 30, 2000 was $562,403
compared to income from operations of $1,865,169 for the year ended June 30,
1999. The decline in income from operations was principally the result of lower
gross margins described above, partially offset by decreased SG&A expenses.
Interest expense for the year ended June 30, 2000 was $1,307,732, up 57%
from $835,619 for the year ended June 30, 1999. Higher interest costs during
fiscal 2000 were due to higher financing requirements as a result
10
<PAGE>
of increased accounts receivables, inventories, and work-in-process for Atlas,
higher interest rates and the new indebtedness incurred by the Company for the
purchase of Westland.
For the year ended June 30, 2000, the income tax benefit was $363,000.
This tax benefit differs from what it would have been under the statutory rate
due primarily to research and experimentation (R&E) tax credits the Company has
calculated.
At June 30, 2000 the balance sheet includes a deferred tax asset whose
realization depends on generating future taxable income. This asset includes
R&E credit carryforwards totaling approximately $844,000 that will begin to
expire in 2012 and net operating loss carryforwards totaling approximately
$1,074,000 that will begin to expire in 2020. Taking into consideration the
historical results of operations of Atlas & Westland, the Company believes it is
more likely than not that these carryforwards will be realized in the future.
However, due to the past IRS audit with respect to the R&E tax credits and the
costs the Company incurred in defending these credits, the R&E credit
carryforwards include a 50% reserve.
For the year ended June 30, 2000, a net loss of $256,280 was incurred as
compared to net income for the year ended June 30, 1999 of $974,290. The net
loss during fiscal 2000 was due to factors cited above, including cost overruns
on certain projects, lower volume, lower gross margins, and increased interest
expense. These factors were partially offset by a decrease in SG&A expenses.
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenues earned for the fiscal year ended June 30, 1999 were $34,001,248; a
decrease of 6% compared to revenues earned of $36,040,278 for the fiscal year
ended June 30, 1998. Approximately 40% of the Company's revenues earned were to
foreign customers during this period, compared to approximately 30% during the
previous year. The Company's backlog as of June 30, 1999 approximated
$16,000,000, a 6% decline versus the $17,000,000 backlog at June 30, 1998.
The Company management believes the declines in revenues earned and order
bookings during fiscal 1999, and backlog at June 30, 1999, were due to a lack in
growth of capital spending by North American automakers including General Motors
Corporation, Ford Motor Company, and DaimlerChrysler Corporation. Atlas
management believes other factors included the Company's slower than expected
market entry into certain geographic markets in Europe, continued economic
difficulties and depressed market conditions in certain Asian markets which the
Company serves, and a general slowdown in domestic capital spending activity for
machine tools and equipment due to the uncertain outcome of Autumn 1999 contract
negotiations in the U.S. and Canada between members of the United Auto Workers
(UAW) and GM, Ford, and DaimlerChrysler.
Cost of revenues earned sold for the fiscal year ended June 30, 1999 were
$24,609,631, a level approximating 72% of revenues earned, compared to
$27,562,608, or 76% of revenues earned, for the 1998 fiscal year. Cost of
revenues earned relative to revenues earned improved by 4% and was due to an
increase in the Company product line standardization and an operating cost
reduction program begun in January 1999.
Gross profits for the year ended June 30, 1999 were $9,391,617, an 11%
increase from the $8,477,670 gross profit of a year earlier. The increase in
gross profits is related to the above-described decline in costs of products
sold from fiscal 1998 to 1999. The Company engineered, designed, and obtained
greater product line standardization in fiscal 1999 than existed for its product
lines in fiscal 1998, and implemented an operating cost reduction program
beginning in January 1999. The decline in costs of products sold and the
related increase in gross profits in fiscal 1999 would have been greater if the
Company had not incurred expenses to obtain, in December 1998, ISO 9001
certification and additional quality related awards, implement a new enterprise
resource planning ("ERP") computer system, and higher warranty costs associated
with the launch of several new products. A portion of ISO 9001 certification
and ERP implementation costs were charged to specific products being delivered
and therefore to cost of revenues earned in 1999.
11
<PAGE>
Selling, general and administrative (SG&A) expenses in fiscal 1999 were
$7,526,448 compared to $8,538,166 in fiscal 1998, a decrease of 12%. The
decrease primarily resulted from the non-recurrence of approximately $750,000 in
legal expenses associated with a lawsuit settlement in fiscal 1998, the cost
reduction program initiated in the third and fourth quarters of fiscal 1999, and
cost savings associated with the retirement of Ronald M. Prime, former Atlas
CEO, in December 1998.
A bonus restructuring expense of $2,131,903 was incurred in 1998. There
was no such expense in fiscal 1999.
Income from operations was $1,865,169 in fiscal 1999 as compared to a loss
from operations of $2,192,399 in fiscal 1998. As part of the 1998 bonus
restructuring plan, the Company made distributions to Ronald Prime and Michael
D. Austin in fiscal 1999 as follows: (1) 300,000 shares of common stock
restricted from transfer or resale for a period on three years, and (2) payment
of the first of four equal payments of deferred compensation which equal, in the
aggregate, $1,660,564. In addition, $560,000 held in escrow was released to
Messrs. Prime and Austin during fiscal 1999. The escrow related to a dispute
between the Company and the Internal Revenue Service (IRS) related to research
and experimentation credits claimed by the Company's predecessor for fiscal
years ended June 30, 1991 though 1995. As noted above, the Company resolved the
dispute with the IRS during the fiscal year.
Interest expense during fiscal 1999 was $835,619, compared to $1,057,725 in
fiscal 1998, a decrease of 21%. The decrease in interest expense for the period
was due to an overall reduction in use of the Company's working capital line of
credit and slightly lower interest rates during the fiscal year.
Income before tax during fiscal 1999 was $1,074,290 as compared to a loss
before tax of $2,962,350 for fiscal 1998. The increase in pre-tax income was
due to the factors described above, including higher gross margins from product
standardization, lower fixed and interest costs, and non-recurrence of lawsuit
and bonus restructuring charges. Income tax for the fiscal year 1999 was
$100,000 as compared to an income tax benefit of $950,000 for fiscal year 1998.
Included in the tax for 1999 were tax credits of approximately $246,000
associated with research and development activities. As outlined in detail in
the Company's Form 10-K for the fiscal year ended June 30, 1998, the Company
reported charges in fiscal 1998 related to legal settlements and bonus
restructuring. In the fiscal year ended June 30, 1999, the Company incurred
none of these charges against earnings. In addition, the Company settled a
dispute with the IRS during the fiscal year in connection with credits that the
Company claimed previously for fiscal years ended June 30, 1991 through 1996.
As a result of the settlement with the IRS, the Company utilized available tax
credits in fiscal 1999, which improved net earnings relative to those reported
in 1998.
Net income during the fiscal year 1999 was $974,290, as compared to a net
loss of $2,012,350 for fiscal 1998. Fiscal 1999 earnings per share were $0.40
based upon 2,431,986 weighted average shares outstanding, compared to a loss per
share in fiscal 1998 of ($0.95) based upon 2,125,000 weighted average shares
outstanding.
Liquidity and Capital Resources
Management believes financing facilities currently in place, along with
anticipated cash available from operations, will be sufficient for general
operations. On July 31, 2000, the Company was scheduled to repay approximately
$417,000 (including interest) of the subordinated deferred indebtedness totaling
$1,108,352 due to the former owners of Atlas. This repayment has been postponed
for an indefinite period of time. Instead, cash is being conserved for ongoing
operations. In addition, the Company's bank has requested the postponement of
the payment of the $417,000 until the Company's financial results improve.
At June 30, 2000, the Company had (1) debt of $11,738,148 under the line of
credit, and $3,700,000 of Industrial Revenue Bond obligations, payable over the
12 years remaining in their term, (2) deferred executive compensation
obligations of $1,108,352 scheduled to be paid over three equal annual
installments during the period from July 2000 through July 2002, (3) five year
term debt of $3,600,000, bearing interest at 125 basis points over the prime
rate, incurred in February 2000 to purchase Westland, (4) five year subordinated
term debt of $2,750,000,
12
<PAGE>
payable to the former owner of Westland and bearing a fixed interest rate of
9.25%, incurred in February 2000 to purchase Westland, and (5) other debt of
$64,903. This total of $22,961,403 compares to a total combined long-term debt
financing and line of credit balance of $15,835,779 as of June 30, 1999. The
increase in indebtedness at June 30, 2000 is principally due to indebtedness
incurred to finance the acquisition of Westland.
The Company believes that its short-term credit availability is adequate to
support its business operation at current and near-term anticipated sales
levels. This excludes the repayment of previously scheduled subordinated
deferred indebtedness as noted above. Working capital at June 30, 2000 was
$14,816,624 and the current ratio was 2.8 to 1, as compared to working capital
of $13,818,002 and a current ratio of 3.6 to 1 for the Company at June 30, 1999.
The Company's revolving credit agreement and term loan with a bank impose
financial levels of tangible capital funds, specified leverage ratios (debt to
equity), and fixed expense coverage. At June 30, 2000, the Company was not in
compliance with the financial covenants specified in the agreements. On October
13, 2000, the Company obtained a waiver from the bank waiving its acceleration
rights as a result of the Company's noncompliance. In addition, the financial
covenants were amended to provide for less stringent requirements through June
30, 2001. Based on current projections for the year ending June 30, 2001,
management believes operations will provide sufficient funds to enable the
Company to meet the amended requirements.
Contingencies
Atlas has accrued certain financial reserves for contingencies of bad
debts; product warranty and health insurance run off costs.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The FASB issued SFAS No. 137
in June 1999 to delay the effective date of SFAS 133 to the first quarter of the
fiscal year beginning after June 15, 2000 (July 1, 2000 for the Company). The
adoption of SFAS 133, as amended by SFAS 137, will not have any effect on the
Company's results of operations or its financial position.
Forward-Looking Statements
Various statements in this Report concerning the manner in which the
Company intends to conduct its future operations and potential trends that may
affect future results of operations are forward-looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors. These factors include but are not limited to what management believes
is a current softening of the domestic and foreign markets for automobiles and
automotive parts resulting in reduced demand for the Atlas' automation
equipment; potential technological developments in the metal forming and
handling automation equipment markets which may render Atlas' automation
equipment noncompetitive or obsolete; the risk that Atlas may not succeed in its
ongoing patent suit against Orchid; the risk that Westland's customers may be
unwilling or unable to continue ordering control panels; and the tightening of
credit availability generally or under the Company's credit facility which may
render the Company unable to access needed working capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the Company's indebtedness of $22,961,403 at June 30, 2000, obligations
in the amount of $2.75 million were fixed rate obligations and the balance of
approximately $20.2 million, including $3.6 million incurred in February 2000 to
purchase Westland, were variable rate obligations. In August 2000, the Company
converted $5.0 million of its variable rate debt to fixed rate debt under its
credit facility through an interst rate swap transaction. Assuming an immediate
10% increase, as of September 30, 2000, in the interest rates on all of the
Company's variable rate obligations, the impact to the Company in annualized
interest payable would be approximately $150,000.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements of the Company as set forth on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Set forth below is information concerning each director of the Company,
including his business experience during at least the past five years, his
positions with the Company, and certain directorships held by him. Except as
hereinafter described, there are no family relationships among any of the
directors or any arrangements or understandings between any director and another
person pursuant to which he was selected as a director.
<TABLE>
<CAPTION>
Director
Director Age Since Current Position
-------- --- -------- ----------------
<S> <C> <C> <C>
Class I Directors
Alan I. Goldman.............................. 63 1993 Director
Jesse A. Levine.............................. 33 1993 Director, Chief Financial Officer,
Vice President, Secretary and Treasurer
Class II Director
Michael D. Austin............................ 49 1999 Director, and President and Chief Executive
Officer of the Company's Atlas Technologies,
Inc. subsidiary
Class III Directors
Samuel N. Seidman............................ 66 1993 Director, Chairman of the Board, President and
Chief Executive Officer
Alan H. Foster............................... 75 1993 Director
</TABLE>
The Company's Board of Directors is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of office of the Class I directors will continue
until the next annual meeting of the Company. The term of office of the Class II
directors will continue until the annual meeting of the Company held in fiscal
2002. The term of office of the Class III directors will continue until the
annual meeting of the Company held in fiscal 2003. In each case, a director will
hold office until the next annual meeting of stockholders at which his class of
directors is to be elected.
Class I Directors
Alan I. Goldman has been a Director of the Company since its inception.
Since 1985, Mr. Goldman has been self-employed as an investment banker and
management consultant, specializing in mergers and acquisitions, private
placements and business and organization consulting. Since 1999, Mr. Goldman
has also served as Chairman of the Board, Chief Financial Officer and Treasurer
of SGAinteractive, Inc., a privately held Internet training and communications
company. From 1975 to 1985, Mr. Goldman was Senior Vice President, Finance and
Chief Financial Officer of Management Assistance, Inc., a multi-national
computer manufacturing, marketing and maintenance company and a purchaser and
user of productions systems and components. From 1970 to 1974, Mr. Goldman was
Vice President, Finance, Treasurer and Chief Financial Officer of Interway
Corporation; an
14
<PAGE>
international company engaged in trailer and container leasing and fleet
management. Mr. Goldman was also a director of Substance Abuse Technology, Inc.;
at the time it filed a Chapter 11 bankruptcy petition in 1997. Mr. Goldman
earned a B.A. degree from Cornell University and an M.B.A. degree from New York
University.
Jesse A. Levine has been Secretary, Treasurer and a Director of the Company
since its inception, Chief Financial Officer since June 1995 and a Vice
President since May 1996. Since January 1992, Mr. Levine has been Vice
President and then Senior Vice President of Seidman & Co., Inc., specializing in
financial and business analysis, corporate finance, private placement financing,
merger and acquisition, and corporate advisory services. Previously, Mr. Levine
served as a commercial credit analyst for Society Bank, Michigan. Mr. Levine
earned a B.A. degree, with highest honors distinction, in economics from the
University of Michigan and has been elected a chartered financial analyst.
Samuel N. Seidman, the President, Chief Executive Officer, and Chairman of the
Company, is Mr. Levine's uncle.
Class II Director
Michael D. Austin is currently the President and Chief Executive Officer of
the Company's Atlas Technologies, Inc. subsidiary. From 1996 to 1998, Mr.
Austin held the position of President of Atlas Technologies, Inc., and was
primarily responsible for directing the marketing and sales activities of the
company for determining the overall product directions, managing product
research and development, and managing the application engineering department.
From 1977 to 1996, Mr. Austin held various other management positions at Atlas
Technologies, Inc., including Vice President of Operations, Vice President of
Sales and Marketing, Sales Manager, and Controls Manager. From 1973 to 1977,
Mr. Austin held various controls engineering and management positions at Fluid &
Electric Control Co., including Chief Engineer. Mr. Austin serves on the board
of directors or board of advisors of the Society of Manufacturing Engineers, the
Flint-Genesee Economic Growth Alliance, the Genesee Area Focus Council, the
Manufacturers Innovation Council, Kettering University, Baker College and Mott
Community College. Mr. Austin holds U.S. and foreign patents for certain
apparatus and methods for forming workpieces.
Class III Directors
Samuel N. Seidman has been President and a Director of the Company since
its inception. In 1970, Mr. Seidman founded Seidman & Co., Inc., an investment
banking firm, and serves as its President. In this capacity, he has provided a
broad range of investment banking services, including financial analysis and
valuations, private financings, and corporate recapitalizations and debt
restructurings. Mr. Seidman also serves as a director of AMREP Corporation, a
real estate development corporation listed on the New York Stock Exchange. He
has acted as financial advisor to manufacturers of various kinds of production
systems and components for a number of industries, including ASM International,
N.V., and a multi-national producer of automated equipment and systems for the
production of semiconductor traded on the Nasdaq National Market. Mr. Seidman
advised in the sale of ASM Fico Tooling, Inc., a European-based multi-national
manufacturer of specialized tooling for the semiconductor industry. Mr. Seidman
was Co-Chairman of the Creditors' Committee in the Chapter 11 reorganization of
Sharon Steel Corp., an integrated manufacturer of finished steel products, and
served as financial advisor in Chapter 11 to Chyron Corp., a specialized
producer of television character generation equipment for video productions
listed on the New York Stock Exchange, and Mr. Gasket Co., a manufacturer of
automobile aftermarket products. Prior to founding Seidman & Co., Mr. Seidman
worked in corporate finance at Lehman Brothers. Mr. Seidman earned a B.A.
degree from Brooklyn College and a Ph.D. in economics from New York University.
He was a Fulbright Scholar and a member of the graduate faculty of the City
University of New York. Mr. Seidman's nephew, Jesse A. Levine, is Vice
President, Chief Financial Officer, Secretary, Treasurer and a Director of the
Company.
Alan H. Foster has been a Director of the Company since its inception.
Since 1986, he has been an Adjunct Professor of Finance and Corporate Strategy
at the University of Michigan. Since 1978, Mr. Foster has been the principal of
A.H. Foster & Company, a consulting firm, which serves as a consultant in
corporate finance to foreign governments, and domestic and international
clients. Currently, Mr. Foster is a director of Code-Alarm, Inc., a
manufacturer of automobile security systems. For the last 12 years, Mr. Foster
has served numerous times as a court-
15
<PAGE>
appointed trustee in bankruptcy for both Chapter 7 and Chapter 11 cases. He was
employed by the American Motors Corporation from 1963 to 1978, where he first
served as Director, Financial Planning and Analysis and then as Vice President
and Treasurer for the last ten of those years. From 1953 to 1963, Mr. Foster
worked at Sylvania Electric Products in various capacities, including Manager,
Corporate Planning and Control. Mr. Foster is the author of Practical Business
Management, published in 1962. Mr. Foster earned a B.S.B.A. degree from Boston
College and an M.B.A. degree from Harvard Business School.
Executive Officers
The following table sets forth certain information concerning each individual
who currently serves as an executive officer of the Company. Executive officers
are appointed by the Board of Directors and serve at the discretion of the
Board. Except as specifically described, there are no family relationships
among any of the executive officers or any arrangements or understandings
between any executive officer and another person pursuant to which he was
selected as an executive officer.
Executive Officers Current Position
------------------ ----------------
Samuel N. Seidman........ Chairman of the Board, President and Chief
Executive Officer
Jesse A. Levine.......... Chief Financial Officer, Vice President, Secretary
and Treasurer
Michael D. Austin........ President and Chief Executive Officer of Atlas
Technologies, Inc.
Robert Cuccaro........... Vice President, Corporate Controller
See "Directors" in this Item 10 for a description of the business
experience during at least the past five years of Messrs. Seidman, Levine and
Austin.
Robert J. Cuccaro, 45 years of age, joined the company on May 26, 2000 and
currently holds the position of Vice President, Corporate Controller. Mr.
Cuccaro is primarily responsible for working closely with each of the operating
subsidiaries in planning and executing operating efficiencies, enhancing
financial and operation reporting, increasing cash generation, enhancing cash
management and identifying cost reduction opportunities. From 1998 to 2000, Mr.
Cuccaro held positions of General Manager and Controller for the Ring Group and
Karmazin Products Corporation and was responsible for directing sales, human
resources, production control, accounting and finance. From 1996 to 1998, Mr.
Cuccaro held the position of Chief Financial Officer/Division Controller for
Stewart Connectors Division, Inc. a subsidiary of Insilco Corporation. From
1994 to 1996, Mr. Cuccaro held various positions including Plant Controller and
Corporate Controller with Clark Material Handling Corporation, a subsidiary of
Terex Corporation. Previously, from 1982 to 1994, Mr. Cuccaro held various
financial positions at UNISYS Corporation including Controller and Sales
Director. Mr. Cuccaro has extensive international, manufacturing, financial
reporting and systems experience. Mr. Cuccaro earned his B.S. degree from
Rutgers University and attended graduate studies classes at Fairleigh Dickinson
University in New Jersey.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain of its officers and persons who own more than 10% of the
Company's Common Stock to file reports of ownership and changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms furnished to it, and written representations
that no other reports were required, the Company believes that during the fiscal
year ended June 30, 2000, each of its officers, directors and 10% stockholders
complied with the Section 16(a) reporting requirements, except that Michael D.
Austin, the President and Chief Executive Officer of Atlas Technologies, Inc.,
did not timely file a Form 4 to report his open market purchases of shares of
the Company's common stock in October 1999. His
16
<PAGE>
failure to timely file was inadvertent, he did not sell any shares within six
months before such purchases or at any time following such purchases, and he has
since made appropriate filings with the SEC to report such purchases. In
addition, Robert J. Cuccaro inadvertently failed to file a Form 3 to disclose
his position as the Company's Vice President, Controller in a timely
manner, which form has since been filed. He owns no shares of the Company's
stock.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
During fiscal 2000, the Company's non-employee directors, Alan I. Goldman
and Alan H. Foster, received $12,000 per annum, payable quarterly. The members
of the Audit Committee, Messrs. Goldman and Foster, also received $1,000 for
attending the two Audit Committee meetings held in fiscal 2000 ($500 per
meeting). All directors other than the Chairman are entitled to receive payment
of $1,000 per day, as determined by the Chairman, for actual days spent by them
providing consulting services to the Company or performing other special
services for the benefit of the Company.
Executive Officer Compensation
The following table shows all compensation paid by the Company for the
fiscal years ended June 30, 1998, 1999 and 2000 to (1) the person who has served
as the chief executive officer of the Company at all times since the beginning
of fiscal 2000 (Samuel N. Seidman), and (2) the only executive officer of the
Company, other than the chief executive officer, who served as an executive
officer at any time during fiscal 2000 and whose income exceeded $100,000
(Michael D. Austin) (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------ -------------------------------------------
Name and Fiscal Year Restricted Securities
Principal Position ended June 30, Salary ($) Bonus ($) Stock Awards (#) Underlying Options (#)
------------------ -------------- ---------- ----------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
Samuel N. Seidman 2000 78,750 --- --- ---
1999 65,000 --- --- ---
1998 75,000 --- --- ---
Michael D. Austin 2000 203,770 --- --- ---
1999 201,179 --- --- ---
1998 196,888 718,192 (1) 150,000 ---
</TABLE>
_______________
(1) Represents amounts to which Mr. Austin was entitled under a deferred
compensation plan.
Option Awards and Values. Samuel N. Seidman received 68,000 options. No
other options or stock appreciation rights were awarded to any of the Named
Executive Officers in fiscal 2000. The following table sets forth information
concerning the aggregate number and values of options held by the Named
Executive Officers as of June 30, 2000. None of the Named Executive Officers
holds stock appreciation rights and none of such persons exercised any options
in fiscal 2000.
17
<PAGE>
Aggregate Year-End Option Values
<TABLE>
<CAPTION>
Number of unexercised options Value of unexercised in the money
at fiscal year end (#) options at fiscal year end ($)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Samuel N. Seidman 158,833 --- --- ---
Michael D. Austin --- --- --- ---
</TABLE>
Employment Agreements
In May 1996, Mr. Michael D. Austin entered into an employment agreement with
Atlas Technologies, Inc. (subsequently amended in June 1998) under which he
currently serves as the President and Chief Executive Officer of Atlas
Technologies, Inc. Mr. Austin's agreement terminates on December 31, 2001. The
agreement requires Mr. Austin to devote substantially all of his business time
and attention to the affairs of Atlas Technologies, Inc. The agreement provides
for a base salary of $198,588 per year, subject to cost-of-living increases
after December 31, 1998, for six weeks vacation per year, reimbursement of
business expenses, use of an automobile and mobile telephone, medical and life
insurance benefits and other benefits generally made available to other
employees. The employment agreement also contains provisions restricting the
disclosure of confidential information and non-competition covenants. As part of
the fiscal 1998 bonus restructuring agreement, Atlas Technologies, Inc. also is
scheduled to pay to Mr. Austin deferred compensation of $718,192 payable in
annual installments with 6.1% interest with final payment due July 2002.
Compensation Committee Interlocks and Insider Participation
The full Board of Directors of the Company serves as the Company's
Compensation Committee. There have not been since the beginning of fiscal 2000
any interlocking relationships, as defined in the regulations of the Securities
and Exchange Commission, involving any person who has served on the Company's
Board of Directors since that time. See Item 13 for a description of certain
transactions and relationships of the Company with directors of the Company
since the beginning of fiscal 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying footnotes sets forth certain information
as of September 30, 2000 with respect to the stock ownership of (1) each
stockholder known by the Company to be a beneficial owner of more than 5% of the
Company's Common Stock, (2) each director and nominee of the Company, (3) the
Company's Chief Executive Officer, and (4) all directors and executive officers
of the Company as a group (based upon information furnished by such persons).
Shares of Common Stock issuable upon exercise of options which are currently
exercisable or exercisable within 60 days of the date of the Proxy Statement
have been included in the following table. See Item 11 for additional
information regarding the stock options granted to the indicated persons. The
business address of the persons listed below is Productivity Technologies Corp.,
206 South Main Street, 2nd Floor, Ann Arbor, Michigan 48104.
18
<PAGE>
Name of Beneficial Number of Shares Percentage of Shares
Owner Beneficially Owned Beneficially Owned
------------------ ------------------ --------------------
Michael D. Austin 285,000 11.5
Samuel N. Seidman 285,083 (1) 10.8 (3)
Ronald Prime 163,350 (4) 6.6
Jesse A. Levine 149,583 (1)(2) 5.8
Alan I. Goldman 48,250 (1) 1.9
Alan H. Foster 43,250 (1) 1.7
All directors and
executive officers as
a group (4) 811,166 (4) 32.8
______________________
(1) Includes shares of Common Stock issuable upon immediately exercisable
warrants and options as follows: Mr. Seidman - 158,833 shares; Mr. Levine -
106,333; Mr. Foster - 22,000 shares; Mr. Goldman - 22,000 shares.
(2) Includes 4,000 shares gifted by Mr. Levine to a related minor.
(3) The percentage in this column is calculated by dividing the number of
shares beneficially held by the individual or group shown on each line by
the sum of (i) the number of outstanding shares of Common Stock and (ii)
any shares of Common Stock issuable upon the exercise of options held by
such individual or group members, but for no other person. Consequently,
although Mr. Seidman beneficially owns more shares than Mr. Austin, the
shares included in the denominator to calculate his percentage includes the
shares issuable to him upon the exercise of his options and, therefore, his
deemed ownership percentage in that of the Company is less than that of Mr.
Austin.
(4) Includes shares of Common Stock issuable upon immediately exercisable
warrants and options to Mr. Seidman, Mr. Levine, Mr. Foster and Mr.
Goldman, as disclosed in note 1. Mr. Prime's shares are not included in
the total as he is not a director or officer of the Company. Excludes
2,500 shares which shall be beneficially owned by Robert Cuccaro on
November 26, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seidman & Co., Inc., an affiliate of the Company, makes available to the
Company office space, as well as certain office, administrative and secretarial
services as may be required by the Company. The Company paid Seidman & Co.,
Inc. $25,000 in the fiscal year ended June 30, 2000 for such services. In
January 2000, the Company moved its headquarters to Seidman & Co., Inc.'s
offices in Ann Arbor, Michigan, and the amount of this payment was reduced.
Samuel N. Seidman, a director and the Chairman, President and Chief Executive
Officer of the Company, is President of Seidman & Co., Inc., and Jesse A.
Levine, a director, Chief Financial Officer, Vice President, Secretary and
Treasurer of the Company, is Senior Vice President of Seidman & Co., Inc. See
Item 11 for a description of the employment agreement entered into between the
Company and Michael D. Austin, the President and Chief Executive Officer of
Atlas Technologies, Inc.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on the Exhibit Index.
(b) Reports on Form 8-K.
On May 3, 2000, the Company filed Amendment No. 1 to Current Report on Form
8-K/A to include the historical and pro forma financial information required
with respect to the Westland acquisition.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned herewith duly authorized.
October 13, 2000 PRODUCTIVITY TECHNOLOGIES CORP.
By: /s/ Samuel N. Seidman
-------------------------------------
Samuel N. Seidman
Chairman, Chief Executive Officer and
President
Pursuant to the requirements of The Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Samuel N. Seidman Chairman, Chief Executive Officer, October 13, 2000
-------------------------------------------- President and Director (Principal
Samuel N. Seidman Executive Officer)
/s/ Michael D. Austin Director October 13, 2000
--------------------------------------------
Michael D. Austin
/s/ Jesse A. Levine Vice President, Secretary, Treasurer October 13, 2000
-------------------------------------------- and Director and Chief Financial
Jesse A. Levine Officer (Principal Financial Officer)
/s/ Robert J. Cuccaro Vice President, Corporate Controller October 13, 2000
-------------------------------------------- (Principal Accounting Officer)
Robert J. Cuccaro
Director
--------------------------------------------
Alan H. Foster
/s/ Alan J. Goldman Director October 13, 2000
--------------------------------------------
Alan J. Goldman
</TABLE>
21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Certificate of Incorporation filed May 28, 1996 (2)
3.3 By-laws (1)
4.1 Form of Common Stock Certificate of the Company (1)
4.2 Form of Warrant Certificate of the Company (1)
4.3 Unit Purchase Option between GKN Securities Corp. and the
Company (1)
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company (1)
10.1 Employment Agreement dated as of May 23, 1996 between Atlas
Technologies, Inc. and Michael D. Austin (3)
10.2 Bonus Restructuring Agreement dated June 30, 1998 between Atlas
Technologies, Inc. and Messrs. Michael D. Austin and Ronald
Prime (4)
10.3 1996 Performance Equity Plan of the Company (3)
10.4 Asset Purchase Agreement dated as of February 23, 2000 among WCS
Acquisition Corp., Productivity Technologies Corp., Westland
Control Systems, Inc. and Thomas G. Lee (5)
27.1 Financial Data Schedule (6)
_____________________________
(1) Filed as an exhibit to Registration Statement on Form S-1, No. 33-78188, and
incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K filed June 7, 1996 and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for fiscal year ended March 31,
1996 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-K for fiscal year ended March 31,
1998 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 8-K/A dated May 3, 2000 and
incorporated herein by reference.
(6) Filed herewith.
22
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Index
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-9
Schedule II - Valuation and Qualifying Accounts F-26
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Productivity Technologies Corp.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of Productivity
Technologies Corp. and Subsidiaries (the "Company") as of June 30, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. We have also audited the schedule listed in the accompanying index. These
financial statements and the schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
the schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Productivity
Technologies Corp. and Subsidiaries at June 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000 in conformity with generally accepted accounting
principles.
Also, in our opinion, Schedule II presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
September 12, 2000, except for
Note 5 which is as of October 13, 2000
F-2
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 5)
Current Assets
Cash $ 538,575 $ 244,400
Short-term investments, including accrued interest 310,085 392,059
Contract receivables, net of allowance for doubtful 9,930,913 7,310,072
accounts of $102,500 and $110,000 (Note 3)
Costs and estimated earnings in excess of 9,756,686 9,714,477
billings on uncompleted contracts (Note 4)
Inventories 1,917,230 641,615
Prepaid expenses and other 202,140 414,366
Deferred income taxes (Note 8) 316,000 431,000
---------------------------------------------------------------------------------------------------------
Total Current Assets 22,971,629 19,147,989
---------------------------------------------------------------------------------------------------------
Property and Equipment
Land 591,514 591,514
Buildings and improvements 4,864,018 4,854,799
Machinery and equipment 4,305,900 3,848,921
Transportation equipment 21,000 31,500
---------------------------------------------------------------------------------------------------------
9,782,432 9,326,734
Less accumulated depreciation 2,074,154 1,483,000
---------------------------------------------------------------------------------------------------------
Net Property and Equipment 7,708,278 7,843,734
---------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization 6,863,908 2,484,204
of $541,439 and $340,521 (Note 2)
Patent, net of accumulated amortization of $18,150 and $-0- 731,850 -
(Note 2)
Deferred income taxes (Note 8) 450,000 -
Other assets 512,172 632,053
---------------------------------------------------------------------------------------------------------
Total Other Assets 8,557,930 3,116,257
---------------------------------------------------------------------------------------------------------
$39,237,837 $30,107,980
---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 4,457,290 $ 1,879,817
Accrued Expenses
Commissions payable 573,404 795,959
Warranty reserve 440,000 200,000
Royalties payable 367,772 373,983
Payroll and related withholdings 316,524 239,536
Other 601,563 717,584
Billings in excess of costs and estimated 58,888 348,049
earnings on uncompleted contracts (Note 4)
Current maturities of executive deferred compensation 348,560 326,706
agreements (Note 11)
Current maturities of long-term debt (Note 5) 991,004 448,353
----------------------------------------------------------------------------------------------------------
Total Current Liabilities 8,155,005 5,329,987
Executive Deferred Compensation Agreements, less current
maturities (Note 11) 759,792 1,109,677
Long-Term Debt, less current maturities (Note 5) 20,862,047 13,951,043
----------------------------------------------------------------------------------------------------------
Total Liabilities 29,776,844 20,390,707
----------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 6 and 7)
Common stock; $.001 par value, 20,000,000 shares
authorized; 2,475,000 issued and outstanding 2,475 2,475
Additional paid-in capital 9,966,408 9,966,408
Deficit (507,890) (251,610)
----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 9,460,993 9,717,273
----------------------------------------------------------------------------------------------------------
$39,237,837 $30,107,980
----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues Earned $33,230,195 $34,001,248 $36,040,278
Cost of Revenues Earned 26,334,826 24,609,631 27,562,608
-------------------------------------------------------------------------------------------------------------
Gross Profit 6,895,369 9,391,617 8,477,670
Selling, General and
Administrative Expenses (Note 10) 6,332,966 7,526,448 8,538,166
-------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations Before
Bonus Restructuring Expense 562,403 1,865,169 (60,496)
Bonus Restructuring Expense (Note 11) - - (2,131,903)
-------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations 562,403 1,865,169 (2,192,399)
-------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (1,307,732) (835,619) (1,057,725)
Interest income 66,843 82,466 141,707
Gain on disposal of assets 650 - 89,628
Miscellaneous 58,556 (37,726) 56,439
-------------------------------------------------------------------------------------------------------------
Total Other Expense (1,181,683) (790,879) (769,951)
-------------------------------------------------------------------------------------------------------------
(Loss) Income Before Income Taxes (619,280) 1,074,290 (2,962,350)
Income Tax Expense (Benefit) (Note 8) (363,000) 100,000 (950,000)
-------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (256,280) $ 974,290 $(2,012,350)
-------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share (Note 1) $ (.10) $ .40 $ (.95)
-------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share (Note 1) $ (.10) $ .40 $ (.95)
-------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Common Additional Total
-------------------- Stock To Paid-In Stockholders'
Shares Amount Be Issued Capital (Deficit) Equity
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 2,125,000 $2,125 $ - $9,177,488 $ 786,450 $ 9,966,063
Common stock to be issued
(Note 11) - - 695,520 - - 695,520
Net loss - - - - (2,012,350) (2,012,350)
-------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,125,000 2,125 695,520 9,177,488 (1,225,900) 8,649,233
Common stock issued 350,000 350 (695,520) 788,920 - 93,750
Net income - - - - 974,290 974,290
-------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,475,000 2,475 - 9,966,408 (251,610) 9,717,273
Net loss - - - - (256,280) (256,280)
-------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 2,475,000 $2,475 $ - $9,966,408 $ (507,890) $ 9,460,993
-------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (256,280) $ 974,290 $(2,012,350)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation 601,654 617,527 544,990
Amortization 318,640 171,827 250,829
Provisions for losses on contract receivables (7,500) - 64,500
Inventory net realizable value reserve (200,000) 100,000 80,000
Deferred income taxes (335,000) 44,000 (685,000)
Gain on disposal of assets (650) - (89,628)
Changes in operating assets and liabilities, net
of acquisition
Contract receivables (1,813,341) (2,092,651) 3,917,381
Inventories, prepaid expenses and other (461,647) 279,106 (187,691)
Costs and estimated earnings in excess of
billings on uncompleted contracts-net effect (331,370) (4,510,733) 2,619,765
Accounts payable, accrued expenses
and other 2,549,674 (66,827) 1,000,604
------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 64,180 (4,483,461) 5,503,400
------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of Westland (3,890,621) - -
Expenditures for property and equipment (356,198) (172,506) (1,193,618)
Proceeds from sale of short-term investments-net 81,974 90,221 446,924
Collections on notes receivable 18,566 108,097 109,200
Proceeds from sale of property and equipment 650 - 1,054,431
Purchase of Atlas - - (220,000)
Issuance of notes receivable - - (200,000)
------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Investing Activities (4,145,629) 25,812 (3,063)
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from additions of long-term debt 3,600,000 - -
Net borrowings (payments) on revolving
credit agreement 1,552,008 2,986,975 (4,100,450)
Payments on long-term debt (776,384) (457,383) (71,139)
----------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities 4,375,624 2,529,592 (4,171,589)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash 294,175 (1,928,507) 1,328,748
Cash, at beginning of year 244,400 2,172,457 843,709
----------------------------------------------------------------------------------------------------------------
Cash, at end of year $ 538,575 $ 244,400 $ 2,172,457
----------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Year For
Interest $1,219,447 $ 763,320 $ 1,058,114
Income taxes - 56,687 173,135
----------------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and
Financing Activities
Purchase of Westland with notes payable $2,750,000 $ - $ -
Issuance of shares under employment contracts - 93,750 -
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
1. Summary of Formation of the Company and Basis of Presentation
Significant
Accounting Production Systems Acquisition Corporation ("PSAC") was
Policies incorporated in June 1993 with the objective of acquiring an
operating business engaged in the production systems industry.
PSAC originally selected March 31 as its fiscal year-end. PSAC
completed an initial public offering ("Offering") of common
stock in July 1994 and raised net proceeds of approximately
$9.0 million.
In December 1995, PSAC entered into a Merger Agreement with
Atlas Technologies, Inc. ("Atlas") whereby Atlas would become
a wholly-owned subsidiary of PSAC. (The acquisition was
consummated May 23, 1996 - see Note 2). Subsequently, PSAC
changed its corporate name to Productivity Technologies Corp.
("PTC").
On February 23, 2000, PTC, through a wholly-owned subsidiary
formed for this purpose, purchased substantially all of the
assets of Westland Control Systems, Inc. ("Westland") - see
Note 2.
The accompanying consolidated financial statements include the
accounts of PTC and its wholly-owned subsidiaries, Atlas and
Westland (collectively, "the Company"). All significant
intercompany accounts and transactions have been eliminated
upon consolidation.
Nature of Business
The Company is a manufacturer of automated industrial systems,
machinery, equipment, electrical components and engineering
services. It operates with three manufacturing plants, sales
and engineering offices. Two of the manufacturing plants are
located in Fenton, Michigan and the third is located in
Canton, Michigan.
Sales of products have principally been to automobile and
automotive parts manufacturers and appliance manufacturers.
Other customers include manufacturers of garden and lawn
equipment, office furniture, heating, ventilation and air
conditioning equipment and aircraft. Sales to automotive-
related customers have accounted for the majority of total
annual sales. Sales are predominantly in the United States
but, in recent years, the Company has targeted sales efforts
in Canada, Mexico, Europe and Asia. Export sales during the
twelve months ended June 30, 2000, 1999 and 1998 amounted to
approximately 15%, 40%, and 30%, respectively, of annual
sales.
F-9
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
Short-term Investments
Short-term investments, representing U.S. Treasury Bills with
maturities of twelve months or less, are carried at cost,
which approximates market.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of (1) assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
contract receivables. At times, the amount of cash on deposit
in banks may be in excess of the respective financial
institutions FDIC insurance limit. The Company attempts to
minimize its credit risk by reviewing all customers' credit
histories before extending credit and by monitoring customers'
credit exposure on a continuing basis. The Company establishes
an allowance for possible losses on contract receivables, if
necessary, based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
Fair Values of Financial Instruments
The carrying amounts of the Company's cash, short-term
investments, contract receivables, accounts payable and
accrued expenses approximate fair value because of the short
maturity of these items.
The carrying amounts of the revolving credit agreement and
long-term debt pursuant to the Company's bank credit
agreements approximate fair value because the interest rates
on the majority of the loans outstanding change with market
rates.
F-10
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
Revenue and Cost Recognition
Revenues earned consist primarily of contract revenues from
fixed price contracts, and the related contract costs, are
recognized using the percentage-of-completion method, measured
by the percentage of contract costs incurred to date to total
estimated costs for each contract. The Company estimates the
status of individual contracts when progress reaches a point
where experience is sufficient to estimate final results with
reasonable accuracy.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, repairs and depreciation costs.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
Changes in job performance, job conditions, estimated
profitability, and final contract settlement may result in
revisions to costs and income, and are recognized in the
period the revisions are determined.
The amount of earnings which the Company will ultimately
realize would differ in the near term from the amounts
estimated in the accompanying financial statements if total
actual costs upon completion of a contract are either higher
or lower than the amount estimated.
Inventories
Inventories are stated at the lower of cost (first-in, first-
out) or market and include mainly raw materials and spare
parts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed on the straight-line method, generally using the
following estimated useful lives:
Building and improvements 20 - 40 years
Machinery and equipment 3 - 10 years
Transportation equipment 2 - 5 years
F-11
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
Intangible Assets
Goodwill, representing the excess of cost over the fair value
of net assets acquired in the acquisitions of Atlas and
Westland, is being amortized over twenty-five and twenty
years, respectively, using the straight-line method. The
patent is amortized over its estimated useful life of
approximately 17 years using the straight-line method.
Warranty
The Company warrants under certain circumstances that its
products meet certain agreed-upon manufacturing and material
specifications. The Company records a warranty liability based
on anticipated future claims.
Health Insurance
The Company is self-insured for certain losses relating to
employee medical benefits. The Company has purchased stop-loss
coverage in order to limit its exposure to any significant
levels of medical claims. Self-insured losses are accrued
based upon the Company's estimates of the aggregate liability
for uninsured claims incurred using certain assumptions
followed in the insurance industry and the Company's
historical experience.
Income Taxes
Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes".
Earnings Per Share
Earnings per share reflected in the consolidated statements of
operations are presented in accordance with SFAS No. 128,
"Earnings per Share". The following table presents the
earnings per share calculations:
F-12
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for Basic and
Diluted Earnings Per Share
Net income (loss) $ (256,280) $ 974,290 $(2,012,350)
--------------------------------------------------------------------------------------
Denominator for Basic and
Diluted Earnings Per Share
Weighted average shares
outstanding 2,475,000 2,431,986 2,125,000
--------------------------------------------------------------------------------------
</TABLE>
Options to purchase shares of common stock were outstanding
(see Notes 6 and 7) but were not included in the computation
of diluted earnings per share because (1) in fiscal 1999, the
options' exercise price was greater than the average market
price of the common shares, and (2) there was a net loss in
fiscal 2000 and 1998; therefore any additional shares would be
antidilutive.
Long-Lived Assets
Long-lived assets, such as goodwill, patent and property and
equipment, are evaluated for impairment when events or changes
in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to fair value. No impairment of the Company's
long-lived assets has occurred through June 30, 2000.
Reclassifications
Certain prior year amounts have been reclassified to conform
with current year presentation.
F-13
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). The FASB issued SFAS No. 137 in June
1999 to delay the effective date of SFAS 133 to the first
quarter of the fiscal year beginning after June 15, 2000 (July
1, 2000 for the Company). The adoption of SFAS 133, as amended
by SFAS 137, will not have any effect on the Company's results
of operations or its financial position.
2. Acquisitions On February 23, 2000, PTC, through a wholly-owned subsidiary
formed for this purpose, purchased substantially all of the
assets of Westland pursuant to an Asset Purchase Agreement
entered into on such date for cash of $3,750,000, notes
payable to seller of $2,750,000 (see Note 5), and related
acquisition costs of $140,621. Additional consideration of up
to $2,300,000 may be due the seller dependant upon Westland's
average earnings before interest and taxes during the period
of January 1, 2000 through December 31, 2002.
The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the purchase price has
been allocated to the assets purchased based on the estimated
fair values at the date of acquisition. The excess of the
purchase price over the estimated fair value of assets
acquired of $4,580,621 was recorded as goodwill and is being
amortized on a straight-line basis over twenty years.
The purchase price was allocated as follows:
Working capital $ 1,200,000
Equipment 110,000
Patent 750,000
Goodwill 4,580,621
--------------------------------------------------------------
Purchase Price $ 6,640,621
--------------------------------------------------------------
F-14
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
Unaudited proforma financial information as if the acquisition
of Westland had taken place July 1, 1998 is as follows:
2000 1999
--------------------------------------------------------------
Revenues $38,491,000 $41,279,000
Net income 464,000 1,224,000
--------------------------------------------------------------
Earnings Per Share - Basic
and Diluted .19 .50
--------------------------------------------------------------
These unaudited proforma results have been prepared for
comparative purposes only and include certain adjustments,
such as additional amortization expense as a result of
goodwill and patent, a decrease in wages for Westland's seller
based on his new employment agreement, an increase in interest
expense related to the financing of the acquisition, and the
related effect on income tax expense. They do not purport to
be indicative of the results of operations that would have
resulted had the acquisition occurred on the date indicated,
or that may result in the future.
On May 23, 1996, PTC acquired all the outstanding shares of
Atlas for cash of $6,900,000, and related acquisition costs of
approximately $337,060. During fiscal 1998, a final purchase
price adjustment resulted in $220,000 of additional goodwill.
The acquisition, which was pursuant to a Merger Agreement
dated December 18, 1995, also included certain employment
agreements with bonus arrangements involving the principal
shareholders of Atlas (see Note 11).
3. Contract The contract receivables consisted of:
Receivables
June 30, 2000 1999
-------------------------------------------------------------
Billed
Completed contracts $ 2,695,656 $ 1,575,972
Uncompleted contracts 7,337,757 5,577,034
Unbilled - 267,066
--------------------------------------------------------------
Total Contracts Receivable 10,033,413 7,420,072
Less allowance for
doubtful accounts (102,500) (110,000)
-------------------------------------------------------------
Total $ 9,930,913 $ 7,310,072
-------------------------------------------------------------
F-15
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
4. Costs and Costs and estimated earnings on uncompleted contracts
Estimated consisted of the following:
Earnings on
Uncompleted
Contracts
<TABLE>
<CAPTION>
June 30, 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $16,510,836 $19,018,174
Estimated Earnings 7,245,332 8,649,123
--------------------------------------------------------------------------------------
23,756,168 27,667,297
Less billings to date 14,058,370 18,300,869
--------------------------------------------------------------------------------------
Total $ 9,697,798 $ 9,366,428
--------------------------------------------------------------------------------------
</TABLE>
The above totals are included in the accompanying balance
sheets under the following captions:
<TABLE>
<CAPTION>
June 30, 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 9,756,686 $ 9,714,477
Billings in excess of costs and estimated
earnings on uncompleted contracts (58,888) (348,049)
--------------------------------------------------------------------------------------
Total $ 9,697,798 $ 9,366,428
--------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
5. Long-Term Long-term debt consisted of:
Debt
<TABLE>
<CAPTION>
June 30, 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
$16,000,000 revolving credit agreement with a
bank. The amount that may be borrowed under
this agreement is limited to specified
percentages of contract receivables, work in
process and property and equipment of Atlas.
The revolving credit agreement provides for
outstanding borrowings to bear interest at a
rate equal to (a) the bank's prime rate
(which was 9.5% at June 30, 2000) less 1/4%,
or (b) the 30, 60, or 90 day LIBOR rate plus
230 basis points, at the Company's option. No
principal payments on outstanding borrowings
are due until January 31, 2002, at which time
the entire balance is due. Borrowings under
this agreement are collateralized by
substantially all assets of Atlas.
$11,738,148 $10,186,140
First mortgage note payable (1) 3,700,000 4,100,000
$3,600,000 term loan with a bank used for the
purchase of Westland. The agreement provides
for outstanding borrowings to bear interest
at a rate equal to the bank's prime rate
(which was 9.5% at June 30, 2000) plus 1 1/4%
payable monthly. Minimum principal payments
on the outstanding borrowings are due as
follows: February 2002 - $540,000; February
2003 - $900,000; February 2004 - $900,000;
and February 2005 - $1,260,000. Borrowings
under this agreement are collateralized by
substantially all the assets of the Company. 3,600,000 -
</TABLE>
F-17
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Term loans with the former owner of Westland.
The agreements provide for outstanding
borrowings to bear interest at a rate of
9.25%. Principal payments will be made in
five equal installments beginning in February 2,750,000 -
2001.
Other 64,903 113,256
--------------------------------------------------------------------------------------
Total 21,853,051 14,399,396
Less current maturities 991,004 448,353
--------------------------------------------------------------------------------------
Long-Term Debt $20,862,047 $13,951,043
--------------------------------------------------------------------------------------
</TABLE>
(1) In January 1997, the Company borrowed $4,500,000 in
connection with variable rate industrial revenue bonds
issued by The Economic Development Corporation of the
County of Genesee. The note is payable in amounts of
$400,000 per year for fiscal years 2000-2001 and then
$300,000 per year through fiscal 2012. Interest is
payable quarterly and is set weekly by the remarketing
agent at a level which allows the bonds to be sold at
par. The interest rate at June 30, 2000 was approximately
4.0%. To enhance the marketability of the bonds and
guarantee payment of the bonds on the Company's behalf, a
bank has issued its letter of credit through December
2001, whereby a fee of 1% is charged annually. Also, the
bonds are secured by a first mortgage note collateralized
by substantially all assets of the Company.
Scheduled maturities of long-term debt for future years ending
June 30 are as follows: 2001 - $991,004; 2002 - $13,152,047;
2003 - $1,750,000; 2004 -$1,750,000; 2005 - $2,110,000; and
$2,100,000 thereafter.
F-18
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
The Company's revolving credit agreement and term loan with a
bank impose financial levels of tangible capital funds,
specified leverage ratios (debt to equity), and fixed expense
coverage. At June 30, 2000, the Company was not in compliance
with the financial covenants specified in the agreements. On
October 13, 2000, the Company obtained a waiver from the bank
waiving its acceleration rights as a result of the Company's
noncompliance. In addition, the financial covenants were
amended to provide for less stringent requirements through
June 30, 2001. Based on current projections for the year
ending June 30, 2001, management believes operations will
provide sufficient funds to enable the Company to meet the
amended requirements. Accordingly, amounts payable under the
revolving credit agreement and term loan are classified as
long-term in the accompanying balance sheet.
6. Stockholders' On July 5, 1994, PTC consummated its Offering of 1,700,000
Equity units ("Units"). (425,000 shares had been previously issued
for $25,000.) Each Unit consisted of one share of PTC's common
stock, $.001 par value, and two Redeemable Common Stock
Purchase Warrants ("Warrants"). Each Warrant entitles the
holder to purchase from PTC one share of common stock at an
exercise price of $5.00 during the period commencing May 24,
1996, and ending June 24, 2001. The Warrants will be
redeemable at a price of $.01 per Warrant upon 30 days notice
at any time, only in the event that the last sale price of the
common stock is at least $8.50 per share for 20 consecutive
trading days ending on the third day prior to date on which
notice of redemption is given.
PTC also issued 300,000 warrants to certain investors, which
are identical to the Warrants discussed above. No Warrants
have been exercised or granted subsequent to May 23, 1996.
At June 30, 2000, 3,700,000 shares of common stock were
reserved for the issuance upon exercise of the warrants
described above.
The Company is authorized to issue 1,000,000 shares of
preferred stock ($.001 par value) with such designations,
voting and other rights and preferences as may be determined
from time to time by the Board of Directors. No preferred
stock has been issued by the Company.
7. Employee The Company has a 401(k) plan covering substantially all
Benefit Plans employees. The plan allows for eligible employees to defer
a portion of their salary. In addition, discretionary
contributions may be made by the Company. The Company
contributed $154,400 for the year ended June 30, 1999. The
Company made no contributions for the years ended June 30,
2000 and 1998.
PTC adopted a Performance Equity Plan in 1996 to enable the
Company to offer to selected personnel an opportunity to
acquire an equity interest in the Company through the award of
incentives such as stock options, stock appreciation rights
and/or other stock-based awards. The total number of shares of
common stock reserved and available for distribution under the
Plan is 530,000 shares.
F-19
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the
Plan. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant
date as prescribed by SFAS No. 123, net loss and earnings per
share amounts would have been the pro forma amounts indicated
below:
Year Ended June 30, 2000 1998
-------------------------------------------------------------
Net loss - as reported $(256,280) (2,012,350)
Net loss - pro forma (312,996) (2,081,456)
Basic earnings per share - as
reported (.10) (.95)
Basic earnings per share -
pro forma (.13) (.98)
--------------------------------------------------------------
No data has been presented for the year ended June 30, 1999
because there were no options granted during the year.
The fair value of each option grant is established on the date
of the grant using the Black-Scholes option-pricing model with
the following assumptions for 2000 and 1998, respectively:
dividend yield of 0% for both years; expected volatility of
54% and 68%; risk-free interest rate of 6.0% for both years;
and expected lives of 3 years and 2 years.
The effects of applying SFAS No. 123 in the above pro forma
disclosure are not necessarily indicative of future amounts.
F-20
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
A summary of the status of the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
-----------------------------------------------------------------------------
<S> <C> <C>
Outstanding and exercisable at July 1, 1997 255,000 5.00
Granted 40,000 4.13
Expired - -
Exercised - -
-----------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1998 295,000 4.88
Granted - -
Expired - -
Exercised - -
-----------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1999 295,000 4.88
Granted 150,000 1.38
Expired (155,833) 5.00
Exercised - -
-----------------------------------------------------------------------------
Outstanding and Exercisable at June 30, 2000 289,167 $3.00
------------------------------------------------------------------------------
</TABLE>
The weighted-average grant date fair value of options during
fiscal 2000 and 1998 was approximately $.57 and $1.73,
respectively.
The following table summarizes information regarding stock
options outstanding and exercisable at June 30, 2000:
Weighted Average
Options ----------------------------
Outstanding Remaining
Range of And Contractual Exercisable
Exercise Prices Exercisable Life Price
--------------------------------------------------------------
$1.375-$5.00 289,167 3 years $3.00
--------------------------------------------------------------
F-21
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
8. Income Taxes Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amounts used
for income tax purposes.
Significant components of the Company's deferred tax assets
and (liabilities) are as follows:
<TABLE>
<CAPTION>
June 30, 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Current
Warranty accrual $ 150,000 $ 68,000
Inventory net realizable value reserve 34,000 102,000
Research credit carryforward - net - 100,000
Other 132,000 161,000
------------------------------------------------------------------------------------
Net Current Deferred Tax Asset $ 316,000 $ 431,000
------------------------------------------------------------------------------------
Non-Current
Depreciation and basis of assets $(590,000) $(582,000)
Research credit carryforward - net 422,000 210,000
Net operating loss carryforwards 365,000 -
Executive deferred compensation agreement 258,000 377,000
Other (5,000) (5,000)
------------------------------------------------------------------------------------
Net Non-Current Deferred Tax Asset $ 450,000 $ -
------------------------------------------------------------------------------------
</TABLE>
Significant components of income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ (28,000) $ 41,000 $(315,000)
Deferred (335,000) 44,000 (685,000)
State
Current - 15,000 50,000
------------------------------------------------------------------------------------
Total $(363,000) $ 100,000 $(950,000)
------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
The reconciliation of income tax computed at the federal
statutory rate (34%) to income tax expense (benefit) is as
follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit)
at statutory rate $(211,000) $ 365,000 $(1,007,000)
Research credit - net (112,000) (246,000) -
Goodwill amortization
and other non-deductible
items 60,000 59,000 62,000
State income taxes, net
of federal income tax benefit - 10,000 33,000
Other - net (100,000) (88,000) (38,000)
-------------------------------------------------------------------------------------
Income Tax Expense
(Benefit) $(363,000) $ 100,000 $ (950,000)
-------------------------------------------------------------------------------------
</TABLE>
During fiscal 1999, the Internal Revenue Service (IRS)
completed its audit for the fiscal year ended June 30, 1995.
The main area of review was research and experimentation (R&E)
tax credits the Company had calculated and filed for in fiscal
years 1990 through 1995. Due to this ongoing IRS audit and the
uncertainty of its outcome, the Company included significant
reserves when estimating R&E tax credits to be realized in
fiscal 1998 and 1997. As a result of the IRS audit completed
during fiscal 1999, the Company believes it can more
accurately estimate its R&E tax credits. As a result,
management has reduced its reserves related to the prior
years' R&E tax credits by $141,000, and recorded this change
in estimate during 1999 as a reduction in income tax expense.
The Company has tax research credit carryforwards totaling
approximately $844,000 that will begin to expire in 2012.
Based on management's, estimates, these credit carryforwards
have been reduced by 50% for financial statement purposes to
reflect their estimated future value.
In addition, the Company has net operating loss carryforwards
totaling approximately $1,074,000 that will begin to expire in
2020.
F-23
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
9. Export Sales A breakdown of sales, based on shipment location, is as
and Major follows:
Customers
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $28,182,300 $20,241,797 $25,122,943
Mexico 2,456,648 4,684,894 83,581
England 1,936,793 657,957 4,936,652
Canada 161,046 4,651,076 2,000,030
Other foreign countries 493,408 3,765,524 3,897,072
-----------------------------------------------------------------------------------
$33,230,195 $34,001,248 $36,040,278
-----------------------------------------------------------------------------------
</TABLE>
For the years ended June 30, 2000, 1999 and 1998, the
Company's sales to its major customers (each representing more
than 10% of total net sales) amounted to approximately 54%,
30% and 50% of total annual sales, respectively. During 2000,
there were three major customers representing 16%, 18% and 20%
of total net sales, respectively; during 1999, there were two
major customers representing 15% and 14% of total net sales;
and during 1998, there were three major customers representing
27%, 13% and 10% of total net sales.
10. Arbitration On October 1, 1996, the Company received a "Demand For
Settlement Arbitration" by a former customer that alleged, among other
issues, a $15,400,000 claim for damages resulting from a
breach of contract and breach of warranties related to the
design and manufacture of certain industrial equipment. During
fiscal 1998, a "Settlement Agreement and Release Of All
Claims" was executed. The Company settled with the former
customer for $700,000, of which $210,000 was recovered from
insurance coverage. The net expense of $490,000 has been
included in selling, general and administrative expenses
during fiscal 1998.
F-24
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Notes to Financial Statements
--------------------------------------------------------------------------------
11. Bonus During fiscal 1998, the Company amended the employment
Restruct- agreements of two executive officers of Atlas that were
uring previously entered into in connection with the Merger
Agreement (see Note 2). These amended employment agreements
are identical except that one agreement expired on December
31, 1998, and the other expires on December 31, 2001. Each
agreement requires the executive to devote substantially all
of his business time and attention to the affairs of the
Company. Annual compensation under each agreement is
$198,588, subject to cost of living increases for one of the
officers. The amended agreements also provide that each
executive, regardless of future employment, will receive four
annual payments of $207,571 commencing July 30, 1999. Each
executive also received 150,000 shares of restricted common
stock of the Company issued during fiscal 1999. The
restricted common stock has been valued at market value less
a 30% discount for lack of marketability. Included in the
accompanying financial statements as of and for the years
ended June 30, 2000, 1999 and 1998 related to these amended
agreements are the following:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Sheet
Current maturities of executive $ 348,560 $ 326,706 $ -
deferred compensation agreement
Executive Deferred Compensation 759,792 1,109,677 1,436,383
Agreement, less current maturities
Common stock to be issued - - 695,520
-----------------------------------------------------------------------------------
Statement of Operations
Bonus restructuring expense $ - $ - $ 2,131,903
-----------------------------------------------------------------------------------
</TABLE>
The amended agreements described above superseded two
previously existing employment agreements, which provided for
two bonus calculations based on earnings of the Company. As
of June 30, 1998, there was $810,000 to be paid under these
superseded agreements; this amount was paid in fiscal year
1999, and no future amounts are payable.
12. Material During fiscal 2000, the Company made an adjustment which is
Fourth material to the fourth quarter results. This adjustment was
Quarter a write-down in inventory (net of reserve) of $582,000, as
Adjustment a result of a physical inventory taken in July 2000.
F-25
<PAGE>
Productivity Technologies Corp. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended June 30, 2000
Allowance for doubtful accounts
(deducted from contract receivables) $110,000 $ - (1) $ (7,500) $102,500
Inventory net realizable value reserve 300,000 - (2) (200,000) 100,000
Warranty reserve 200,000 960,597 (3) (720,597) 440,000
---------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1999
Allowance for doubtful accounts
(deducted from contract receivables) $110,000 $ - $ - $110,000
Inventory net realizable value reserve 200,000 100,000 - 300,000
Warranty reserve 119,190 960,499 (3) (879,689) 200,000
---------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998
Allowance for doubtful accounts
(deducted from contract receivables) $ 45,500 $ 64,500 $ - $110,000
Inventory net realizable value reserve 120,000 80,000 - 200,000
Warranty reserve 24,078 622,717 (3) (527,605) 119,190
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accounts deemed to be uncollectible (net of accounts collected that were
previously deducted).
(2) Inventory disposed of, charged to reserve.
(3) Actual warranty charges incurred, charged to reserve.
F-26
